Pilgrim's Pride dives on compliance issues; Rite Aid paper slips on earnings, downgrade; GM lower

By Stephanie N. Rotondo

Portland, Ore., Sept. 25 - The distressed bond market took a downward trip Thursday, losing about 2 to 3 points across the board, a trader said.

Likely the biggest loser of the day was Pilgrim's Pride Corp. The company's corporate debt lost 12 to 20-plus points on the day as the company warned of compliance issues regarding its revolving credit facility. The company also said it was expecting to post a heftier loss in the fourth quarter.

Meanwhile, Rite Aid Corp. paper also lost a fair amount of weight on the back of earnings and a downgrade from Moody's Investors Service. Traders deemed the debt down at least 5 points, though one trader opined that the decline was only partly due to earnings.

General Motors Corp.'s term loan continued to lose ground, but this time the slide was blamed on a variety of things, from market technicals to its revised agreement with Delphi Corp.

"It really looked like for awhile it was going to get disastrously ugly," a trader said of the "pretty sloppy" marketplace. "People spent the morning dumping paper and the afternoon trying to read what the [government] bailout plan entails."

Around mid-day, news outlets started to report that the government's $700 billion plan was just about ready. The plan was expected to go to vote in a matter of days.

Pilgrim's Pride nosedives

Pilgrim's Pride paper took a dive after the company warned it could fall out of compliance, losing anywhere from 12 to 24 points on the day.

One trader called the name the "major player" in early trading, quoting the 7 5/8% notes due 2015 at 68.5 bid, 69.5 offered and the 8 3/8% subordinated notes due 2017 at 49 bid, 50 offered. At another desk, a trader said the subordinated paper fell more than 20 points to around 51, while the other issues gave away 12 to 13 points during the session.

Yet another trader deemed the 8 3/8% notes down 20 points at 45 bid, 55 offered and the 7 5/8% notes down 15 points at 68 bid, 75 offered. Another saw the 8 3/8% notes at 50 bid, 52 offered, versus 74 bid, 76 offered on Wednesday, and the 7 5/8% notes at 69 bid, 70 offered, compared with 84 bid, 86 offered.

The chicken producer said Thursday that it would likely not meet its fixed-charge coverage ratio debt covenant on its credit facilities as of Sept. 27, the end of its fiscal year. The company was able to secure a temporary waiver from its lenders until Oct. 28, though a written deal had not yet been inked.

Pilgrim's also said that it was expecting to post a "significant loss" for the fourth quarter. The company attributed the decline to higher costs for feed, as the price of corn and soybeans have reached record levels.

Standard & Poor's subsequently cut its rating on the Pittsburg, Texas-based business to CCC+ from BB-, placing the company on CreditWatch negative. Moody's Investors Service followed suit, cutting its rating on the company's bonds to Caa1 from B3.

Rite Aid slips

Among other big losers of the day, Rite Aid's bonds dropped at least 5 points, which one trader said was due to earnings as well as what was going on in the rest of the market.

The trader pegged the 9½% notes due 2017 and the 9 3/8% notes due 2015 at 57 bid, 58 offered. Another trader saw the 9½% notes at 57.5 bid, 58.5 offered and the 10 3/8% notes due 2016 at 90 bid, 91 offered.

The second trader called the drugstore chain's various issues down 5 to 7 points on the week across the board. However, he said he believed a downgrade from Moody's Investors Service "was already priced in."

At another desk, a market source called the 8 5/8% notes due 205 down 6 points at 56.5 bid.

Rite Aid's term loan levels also headed lower and widened out as Moody's cut its rating on the company because of the weak second quarter numbers that were announced early on in the day. Also affecting the debt was the company's disclosure that guidance estimates were revised downward and management changes have been made, according to traders.

The term loan was quoted at 80 bid, 90 offered, compared with Wednesday's levels of 85 bid, 92 offered, traders said.

Rite Aid's loss in the third quarter widened to $222 million, versus $78.2 million in 2007. Revenue fell 1% to $6.5 million. The company cut its forecast for its full-year results as well.

The Camp Hill, Pa.-based company attributed its disappointing earnings to its continued struggle to integrate the Brooks Eckerd chain, as well as increased promotional spending. As a result, Rite Aid looked to shake things up by hiring new management, as three other members of the management team left the company.

Rite Aid also said Thursday that it plans to use free cash flow to reduce the balance on its revolving credit facility at the end of 2009.

Moody's dropped its rating on the company to Caa1 from B3, citing weak operating performance and the failure to fully integrate its Brooks Eckerd acquisition.

"In this tough retail environment, our core stores delivered solid performance, we made significant progress building our acquired stores' front-end sales, we took steps to increase our financial flexibility and we largely completed the integration of Brooks Eckerd. We also improved our gross profit rate in spite of what has turned out to be a heavily promotional environment in pharmacy as well as front end," Mary Sammons, chairman, president and chief executive officer, said in a news release.

Meanwhile, Claire's Stores Inc.'s debt "was getting a little bit of interest," a trader said.

The trader quoted the 9 5/8% notes due 2015 at 30 bid, 31 offered and the 10½% notes due 2017 at 42 bid, 43 offered.

Another trader said retailers in general were "getting whacked around." He said Blockbuster Inc.'s 9% notes due 2012 fell from around 78 to around 70, while Michael's Stores Inc.'s 11 3/8% notes due 2016 and its 10% notes due 2014 were weaker at 51 bid, 52 offered and 67 bid, 68 offered, respectively.

Burlington Coat Factory Warehouse Corp.'s 11 1/8% notes due 2015 dipped to 61.

GM loan lower

General Motors' term loan continued to grind lower on the bid side, possibly on market technicals, possibly because the company completed its revolver drawdown and possibly because the revised agreement with Delphi was approved by the bankruptcy court, according to traders.

The Detroit-based automotive company's term loan was quoted at 67 bid, 72 offered, compared with previous levels of 68½ bid, 70½ offered, traders said.

Another market source saw the 7 1/8% notes due 2013 fall 3 points to 51 bid.

On Thursday, General Motors said in an 8-K filing with the Securities and Exchange Commission that it borrowed $3.4 billion under its $4.5 billion revolver, as it previously said it intended to do.

The term of the draw is six months.

Proceeds from the draw will be used to help the company maintain a high level of financial flexibility for its ongoing restructuring during uncertain times in the capital markets, and will also be available for the retirement of $750 million of debt maturities coming due in October, and to pay Delphi in excess of $1.2 billion as part of its reorganization efforts.

Also on Thursday, news emerged that the modified settlement and restructuring agreements with Delphi were approved in court.

Under the revised agreement, General Motors will provide Delphi with support of $10.6 billion for its emergence from Chapter 11, increased from roughly $6 billion in the January settlement.

In addition, the agreement modifies the mechanics and expands the amount of Delphi's net hourly pension liability transfer to General Motors to $3.4 billion from $1.5 billion.

Delphi's debtor-in-possession term loan on Thursday was quoted by one trader as unchanged at 84 bid, 89 offered and by a second trader as higher at 86.5 bid, 87.5 offered, compared with 85.25 bid, 87.25 offered on Wednesday. The Troy, Mich.-based company's bonds were seen 2 points softer at 12 bid.

Broad market down 2 to 3 points generally

Sprint Nextel's 6% notes due 2016 slipped 2.5 points from the previous session to around 83, a trader said.

Idearc Inc.'s 8% notes due 2016 continued to decline, falling to 31 bid, 32 offered, the trader continued.

"That's really bordering on ugliness," he said.

Another trader called the paper "down a couple" at 32, while sector rival R.H. Donnelley Corp.'s 6 7/8% notes due 2013 slipped 1 to 2 points to 46 bid, 47 offered. A market source quoted the 8 7/9% notes due 2016 at 41 bid, 43 offered.

In the financial sector, a trader said Washington Mutual's holding company senior paper fell a few more points to around 20, while Lehman Brothers' senior debt dropped about a point to 17.

According to the trader, bid lists have been circulating that include a "bunch of Lehman paper," adding to the large trading volumes in the name.

Another trader placed Lehman bonds at 17.5 bid, 18 offered. He said he had not "heard about bids lists going around though, but wouldn't surprise me."

Sara Rosenberg contributed to this article.

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